Columnists

Budget prism needs change

The Government should do more to promote savings, not stocks, to stem market volatility and protect the economy

The stock market wiped out Rs 10 lakh crore in the week after the Union Budget was presented on February 1. The crash was imminent. It awaited a trigger and the Union Budget provided that in the LTCG — long-term capital gain tax. The market was on a speculative hype. Bulls made the best out of it. Now it is the turn of the bears. Yes, there are stock agents who profit in both situations LTCG or not. In November 2017, this writer had warned about an imminent crash on the bourses. In fact, since July 2017, the stock market has been volatile on many occasions. In November, the fall was led by GST Council’s decision to levy a cess on cigarettes.

The trigger is often innocuous. But it is like a coronary seizure that happens due to the damage caused by cholesterol levels spiking periodically. The market follows a simple dictum: Whatever goes up has to come down; in short, stocks have their upper limits. So, in a fall from a BSE Sensex high of 36,383 on February 1 to a low of 34,082 on February 7, the market shed 2301 points. And this is not the end.

The RBI monetary policy indicating inflation threat and consequent problems too are likely to impact the stock market in the days to come. There is one closely guarded secret that should bother investors. While the stock market dip is being discussed, nobody is talking about the losses in mutual funds where small investors park their money. Many mutual funds have invested heavily in stocks, which means individual portfolios must have got hit thereby impacting bank profiles. The market is keeping this under wraps lest the mayhem intensifies and opens up a can of worms. But it calls for a close scrutiny of each mutual funds and bank assets.

It is being said that since the US market sneezed, following US President Donald Trump triumphant touting of American stock market gains, the BSE is caught a cold. If that is correct, however, why during the past over seven months were market analysts hailing every point that the indices gained in India independent of the US market to take it over 36,000 when most world markets were in tizzy? Of course, the crash in the mother market — the Dow plunged 2200 points in two days — has unnerved stock markets globally and has contributed to the downturn in India but that’s only one factor. Even otherwise, as the US economy is turning over interest rates are rising and a capital flight to the US is natural. A hyped market ignores these realities.

Let us not forget 1992, when stocks surged and credit was given to the reform Budget presented by the then Finance Minister Manmohan Singh. Only some days later, it opened up a bank-financial institutions-stock dealer-corporate nexus, now called the Harshad Mehta Scam, wiping out assets of the Unit Trust of India, LIC and several PSU banks. It led to setting up of the regulator SEBI. The present crash also calls for a deep study. It needs to be analyzed whether an investor should be forced to move the equity market by drying out other sources of investment be it savings, gold or other assets. The world knows that stocks are the riskiest investment which benefit a few and causes loss to millions.

One big reason why people don’t grow rich by investing in stocks is that most investors cannot invest that big — in crores of rupees — to reap a rich harvest in the short-term on the ordinary punter’s mutual fund investments. And how long is the long-term for the punter? It could be 20 to 30 years. Global companies and not just Indian ones are known for concealing their income and losses. Debt is often either not directly factored or shown as income in balance sheets to keep investors in a dream world, CAG reports have revealed in the case of some well-known Indian companies posting “large profits”. Understating bad news is routine. Gross exaggeration as Satyam or Enron did is not uncommon. Regulators have their limitations. They are essentially fire-fighters who swing into action after a mishap has occurred. New regulations are made; companies work out methods to get around them. So, the market can never be foolproof.

The Government has to look into this seriously. Of late, savings have been dis-incentivised as a deliberate policy to promote mutual funds — an indirect stock investment tool — and other equity investment methods. The intention is not bad and is in sync with Western markets. But have we overlooked how stocks have pauperized large numbers of investors in the West? Only the success stories and profits are highlighted. Losses are swept under the carpet. India’s national savings schemes are gradually being made less attractive though these keep national assets intact and ensure happy citizens whose investments are safe. The policy initiated in 1992 needs to be changed. We must not forget that India has grown through difficult times through household savings.

Till the 1992 corporatisation of the Union Budget, scams were few and far in between. Today, they have become a regular feature in one form or another — huge NPAs, which are tantamount to siphoning of the common citizen’s savings are one such; they account for almost 82 per cent of the loans given, as Prime Minister Narendra Modi has said. As a nation, India has to act differently and put its age-old wisdom to use. Savings have to be recognised as a safe and honest method to grow richer over a period of time and they must be incentivised. A first step in the benefits given to the senior citizens up to Rs 50,000 of interest accrual in the 2018-19 Budget is a welcome step. This must be universalised and the limit enhanced to one lakh rupees.

As the Budget would go through many modifications, the Government, while promoting savings, should also consider doing away with the TDS on bank deposits. TDS hurts savings and pauperizes the poor. The prism has to be changed for sustainable long-term growth.